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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2003
Commission File Number 0-22491
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3769020
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Avenue - 7th Fl.
New York, New York 10022
- --------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(212) 559-2011
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes _____ No ___X__
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition at
September 30, 2003 and December 31,
2002 (unaudited). 3
Condensed Schedules of Investments
at September 30, 2003 and December 31,
2002 (unaudited). 4 - 5
Statements of Income and Expenses and
Partners' Capital for the three and
nine months ended September 30, 2003
and 2002 (unaudited). 6
Notes to Financial Statements
(unaudited). 7 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 12 - 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. 16 - 17
Item 4. Controls and Procedures. 18
PART II - Other Information 19
2
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
ASSETS:
Equity in commodity futures trading account:
Cash (restricted $11,524,996 and $6,861,874 in 2003
and 2002, respectively) $63,669,579 $62,798,601
Net unrealized appreciation on
open futures positions 2,529,876 4,029,612
Unrealized appreciation on
open forward contracts 2,554,226 1,823,092
----------- -----------
68,753,681 68,651,305
Interest receivable 39,184 51,898
----------- -----------
$68,792,865 $68,703,203
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Unrealized depreciation on open forward contracts $ 1,641,633 $ 1,907,569
Accrued expenses:
Commissions 331,157 359,772
Management fees 109,732 151,201
Other 54,401 69,055
Redemptions payable 774,809 237,655
----------- -----------
2,911,732 2,725,252
----------- -----------
Partners' Capital:
General Partner, 862.6415 Unit equivalents
in 2003 and 2002, respectively 1,187,555 1,079,096
Limited Partners, 46,993.4447 and 51,880.8267
Redeemable Units of Limited Partnership
Interest outstanding in 2003 and 2002,
respectively 64,693,578 64,898,855
----------- -----------
65,881,133 65,977,951
----------- -----------
$68,792,865 $68,703,203
=========== ===========
See Accompanying Notes to Unaudited Financial Statements.
3
Smith Barney Diversified Futures Fund L.P. II
Condensed Schedule of Investments
September 30, 2003
(Unaudited)
Sector Contract Fair Value
- --------------------------------- ---------------------------------------- -----------------------
Currencies
Unrealized depreciation on forward contracts (2.15)% $ (1,414,112)
Unrealized appreciation on forward contracts 3.72% 2,447,806
----------------
Total forward contracts 1.57% 1,033,694
Future contract sold (0.03)% (19,797)
Future contract purchased 2.40% 1,582,793
----------------
Total futures contracts 2.37% 1,562,996
----------------
Total Currencies - 3.94% 2,596,690
----------------
Total Energy - (0.51)% Futures contracts sold (0.51)% (333,223)
---------------
Grains
Futures contracts sold 0.00%* 2,925
Futures contracts purchased 1.47% 967,447
---------------
Total Grains - 1.47% 970,372
---------------
Interest Rates U.S.
Futures contracts sold (0.17)% (114,050)
Futures contracts purchased 1.39% 914,619
-------------
Total Interest Rates U.S. - 1.22% 800,569
-------------
Interest Rates Non-U.S
Futures contracts sold (0.49)% (323,743)
Futures contracts purchased 0.61% 405,054
------------
Total Interest Rates Non-U.S. - 0.12% 81,311
------------
Total Livestock - 0.09% Futures contracts purchased 0.09% 60,700
-------------
Metals
Futures contract purchased 0.21% 138,075
Unrealized depreciation on forward contracts (0.34)% (227,521)
Unrealized appreciation on forward contracts 0.16% 106,420
--------------
Total forward contracts (0.18)% (121,101)
--------------
Total Metals - 0.03% 16,974
--------------
Softs
Futures contracts sold (0.05)% (33,080)
Futures contracts purchased (0.01)% (9,618)
--------------
Total Softs - (0.06)% (42,698)
--------------
Indices
Futures contracts sold 0.12% 77,073
Futures contracts purchased (1.19)% (785,299)
--------------
Total Indices - (1.07)% (708,226)
--------------
Total Fair Value on Futures and Forwards positions - 5.23% $3,442,469
=============
Country Composition Investments at Fair Value % of Investments at Fair Value
- ------------------------ -------------------------- --------------------------------
Australia $(30,977) (0.90)%
Canada 9,409 0.27
France (29,622) (0.86)
Germany 33,211 0.96
Hong Kong (4,902) (0.14)
Italy 5,171 0.15
Japan (147,342) (4.28)
Spain (42,857) (1.24)
United Kingdom (410,125) (11.91)
United States 4,060,503 117.95
---------------- -----------------
$3,442,469 100.00 %
================ ================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
4
Smith Barney Diversified
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2002
(Unaudited)
Sector Contract Fair Value
Currencies Unrealized depreciation on forward contracts (2.18)% $(1,439,765)
Unrealized appreciation on forward contracts 2.69% 1,773,212
-----------
Total forward contracts 0.51% 333,447
Futures contracts sold (0.06)% (42,212)
-----------
Futures contracts purchased 2.39% 1,579,903
-----------
Total futures contracts 2.33% 1,537,691
-----------
Total Currencies - 2.84% 1,871,138
-----------
Energy - 0.57% Futures contracts purchased 0.57% 374,747
-----------
Grains Futures contracts sold 0.14% 94,600
Futures contracts purchased (0.01)% (9,108)
-----------
Total Grains - 0.13% 85,492
-----------
Interest Rates U.S. Futures contracts sold (0.01)% (9,275)
Futures contracts purchased 0.72% 479,889
-----------
Total Interest Rates U.S. - 0.71% 470,614
-----------
Interest Rates Non-U.S. Futures contracts sold (0.04)% (28,984)
Futures contracts purchased 1.62% 1,072,951
-----------
Total Interest Rates Non-U.S. - 1.58% 1,043,967
-----------
Total Livestock - 0.04% Futures contracts purchased 0.04% 30,300
-----------
Metals Futures contracts purchased 0.31% 205,285
Unrealized depreciation on forward contracts (0.71)% (467,804)
Unrealized appreciation on forward contracts 0.08% 49,880
-----------
Total forward contracts (0.63)% (417,924)
-----------
Total Metals - (0.32)% (212,639)
-----------
Softs Futures contracts sold 0.00% * (2,700)
Futures contracts purchased 0.12% 78,972
-----------
Total Softs - 0.12% 76,272
-----------
Indices Futures contracts sold 0.33% 218,656
Futures contracts purchased (0.02)% (13,412)
-----------
Total Indices - 0.31% 205,244
-----------
Total Fair Value - 5.98% $3,945,135
===========
Investments at % of Investments at
Country Composition Fair Value Fair Value
- ---------------------- -------------------- -----------
Australia $8,692 0.22%
Canada 15,101 0.38
France 2,268 0.06
Germany 510,574 12.94
Hong Kong 45,977 1.17
Japan 183,163 4.64
Spain (7,733) (0.19)
United Kingdom 54,111 1.37
United States 3,132,982 79.41
--------------- ----------
$ 3,945,135 100.00%
=============== ===========
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
5
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
2003 2002 2003 2002
-------------------------- ---------------------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions
and foreign currencies $ (8,561,035) $ 19,667,934 $ 14,277,379 $ 17,892,984
Change in unrealized gains (losses) on open
positions 5,358,658 (2,247,109) (502,666) 3,474,326
------------ ------------ ------------ ------------
Net realized and unrealized gains (losses) (3,202,377) 17,420,825 13,774,713 21,367,310
Interest income 121,858 227,434 453,919 616,174
------------ ------------ ------------ ------------
(3,080,519) 17,648,259 14,228,632 21,983,484
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $82,582, $53,762, $228,503 and $149,597, respectively 1,180,724 1,248,215 3,747,555 3,353,179
Management fees 344,352 475,396 1,150,406 1,281,922
Incentive fees -- 2,070,142 2,316,083 2,374,309
Other expenses 25,508 24,304 70,399 73,446
------------ ------------ ------------ ------------
1,550,584 3,818,057 7,284,443 7,082,856
------------ ------------ ------------ ------------
Net income (loss) (4,631,103) 13,830,202 6,944,189 14,900,628
Redemptions -Limited Partners (1,718,090) (2,309,296) (7,041,007) (9,424,751)
-General Partner -- (502,602) -- (502,602)
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital (6,349,193) 11,018,304 (96,818) 4,973,275
Partners' capital, beginning of period 72,230,326 60,572,508 65,977,951 66,617,537
------------ ------------ ------------ ------------
Partners' capital, end of period $ 65,881,133 $ 71,590,812 $ 65,881,133 $ 71,590,812
------------ ------------ ------------ ------------
Net asset value per Redeemable Unit
(47,856.0862 and 54,076.7766 Redeemable Units outstanding
at September 30, 2003 and 2002, respectively) $ 1,376.65 $ 1,323.87 $ 1,376.65 $ 1,323.87
------------ ------------ ------------ ------------
Net income (loss) per Redeemable Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (94.77) $ 248.97 $ 125.73 $ 278.81
------------ ------------ ------------ ------------
See Accompanying Notes to Unaudited Financial Statements.
6
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
1. General
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on May 10, 1994 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by the
Partnership are volatile and involve a high degree of market risk.
On April 7, 2003, Smith Barney Futures Management LLC changed its name to
Citigroup Managed Futures LLC. Citigroup Managed Futures LLC acts as the general
partner (the "General Partner") of the Partnership. The Partnership's commodity
broker is Citigroup Global Markets Inc. ("CGM"), formerly Salomon Smith Barney
Inc. CGM is an affiliate of the General Partner. The General Partner is wholly
owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), formerly Salomon
Smith Barney Holdings Inc., which is the sole owner of CGM. CGMHI is a wholly
owned subsidiary of Citigroup Inc. As of September 30, 2003, all trading
decisions are made for the Partnership by Capital Fund Management SA, Graham
Capital Management L.P., Campbell & Co., Inc. and Willowbridge Associates Inc.
(each an "Advisor" and collectively, the "Advisors").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at September 30, 2003 and December 31, 2002 and the results of its
operations for the three and nine months ended September 30, 2003 and 2002.
These financial statements present the results of interim periods and do not
include all disclosures normally provided in annual financial statements. You
should read these financial statements together with the financial statements
and notes included in the Partnership's annual report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 2002.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
Certain prior period amounts have been reclassified to conform to current
year presentation.
(Continued)
7
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Redeemable Unit for the three and nine
months ended September 30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ---------------------
2003 2002 2003 2002
Net realized and unrealized
gains (losses) * $ (89.69) $ 291.31 $ 184.98 $ 334.05
Interest income 2.49 4.11 8.88 10.45
Expenses ** (7.57) (46.45) (68.13) (65.69)
--------- -------- ------- -------
Increase (decrease) for period (94.77) 248.97 125.73 278.81
Net Asset Value per Redeemable
Unit, beginning of period 1,471.42 1,074.90 1,250.92 1,045.06
--------- -------- ------- -------
Net Asset Value per Redeemable
Unit, end of period $ 1,376.65 $ 1,323.87 $ 1,376.65 $ 1,323.87
========= ======== ======== ========
* Includes brokerage commissions.
** Excludes brokerage commissions.
8
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------
2003 2002 2003 2002
Ratio to average net assets: ***
Net investment loss before
incentive fees **** (8.2)% (8.8)% (8.4)% (9.1)%
Operating expenses 8.9% 10.4% 9.3% 10.5%
Incentive fees 0.0% 12.3% 4.3% 5.1%
------ ------ ----- -------
Total expenses 8.9% 22.7% 13.6% 15.6%
====== ====== ===== ======
Total return:
Total return before incentive fees (6.4)% 26.7% 13.9% 30.9%
Incentive fees (0.0)% (3.5)% (3.8)% (4.2)%
------ ------ ----- -------
Total return after incentive fees (6.4)% 23.2% 10.1% 26.7%
====== ====== ===== ======
*** Annualized
**** Interest income less total expenses (exclusive of incentive fees)
The above ratios may vary for individual investors based on the timing of
capital transactions during the period.
9
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activities are shown in the Statements of Income and Expenses and Partners'
Capital and are discussed in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Customer Agreement between the Partnership and CGM gives the
Partnership the legal right to net unrealized gains and losses on open futures
positions.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair values during the nine and twelve months
ended September 30, 2003 and December 31, 2002, based on a monthly calculation,
were assets of $3,489,833 and $5,286,046, respectively. The fair values of these
commodity interests, including options thereon, if applicable, at September 30,
2003 and December 31, 2002, were assets of $3,442,469 and $3,945,135,
respectively. Fair values for exchange traded commodity futures and options are
based on quoted market prices for those futures and options. Fair values for all
other financial instruments for which market quotations are not readily
available are based on calculations approved by the General Partner.
4. Financial Instrument Risk:
In the normal course of its business the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
may include forwards, futures and options, whose values are based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties and
include forwards and certain options. Each of these instruments is subject to
various risks
10
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
similar to those related to the underlying financial instruments including
market and credit risk. In general, the risks associated with OTC contracts are
greater than those associated with exchange traded instruments because of the
greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized as unrealized appreciation in the statement of
financial condition and not represented by the contract or notional amounts of
the instruments. The Partnership has credit risk and concentration risk because
the sole counterparty or broker with respect to the Partnership's assets is CGM.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk-adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of September 30,
2003. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures and forward contracts, commodity options and interest receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. While substantial losses could lead to a decrease in liquidity,
no such losses occurred during the third quarter of 2003.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by realized and/or unrealized gains or losses
on commodity futures trading, expenses, interest income, additions and
redemptions of Redeemable Units and distributions of profits if any.
For the nine months ended September 30, 2003, Partnership capital decreased
0.1% from $65,977,951 to $65,881,133. This decrease was attributable to the
redemption of 4,887.3820 Redeemable Units of Limited Partnership Interest
resulting in the outflow of $7,041,007, which was partially offset by net income
from operations of $6,944,169. Future redemptions can impact the amount of funds
available for investment in commodity contract positions in subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
12
and foreign currencies for which market quotations are not readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the period. Realized gains (losses) and changes in unrealized
values on open positions are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on trading of
commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the date of entry into the contracts and the forward rates at the
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statement of income and expenses and partners'
capital.
Results of Operations
During the Partnership's third quarter of 2003 the net asset value per
Redeemable Unit decreased 6.4% from $1,471.42 to $1,376.65 as compared to an
increase of 23.2% in the third quarter of 2002. The Partnership experienced a
net trading loss before brokerage commissions and related fees in the third
quarter of 2003 of $3,202,377. Losses were primarily attributable to the trading
of commodity futures in currencies, energy, U.S. and non-U.S. interest rates and
softs and were partially offset by gains in grains, indices, livestock and
metals. The Partnership experienced a net trading gain before brokerage
commissions and related fees in the third quarter of 2002 of $17,420,825. Gains
were primarily attributable to the trading of commodity futures in U.S. and non
U.S. interest rates, energy, grains, softs and indices and were partially offset
by losses in currencies, livestock and metals.
During the Partnership's nine months ended September 30 2003, the net asset
value per Redeemable Unit increased 10.1% from $1,250.92 to $1,376.65 as
compared to an increase of 26.7% for the nine months ended September 30, 2002.
The Partnership experienced a net trading gain before brokerage commissions and
related fees for the nine months ended September 30, 2003 of $13,774,713. Gains
were primarily attributable to the trading of commodity futures in currencies,
energy, U.S. and non-U.S. interest rates, livestock and indices and were
13
partially offset by losses in grains, metals, and softs. The Partnership
experienced a net trading gain before commissions and related fees for the nine
months ended September 30, 2002 of $21,367,310. Gains were primarily
attributable to the trading of commodity futures in currencies, grains, U.S. and
non-U.S. interest rates, indices and livestock and were partially offset by
losses in energy, metals and softs.
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
depends on the existence of major price trends and the ability of the Advisors
to correctly identify those price trends. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned at the 30-day U.S. Treasury bill rate determined weekly by CGM based
on the average non-competitive yield on 3-month U.S. Treasury bills maturing in
30 days. CGM may continue to maintain the Partnership assets in cash and/or
place all of the Partnership assets in 90-day Treasury bills and pay the
Partnership 80% of the interest earned on the Treasury bills purchased. CGM will
retain 20% of any interest earned on Treasury bills. Interest income for the
three and nine months ended September 30, 2003 decreased by $105,576 and
$162,255, respectively, as compared to the corresponding periods in 2002. The
decrease in interest income is primarily due to the reduction in interest rates
and the effect of redemptions on the Partnership's equity maintained in cash
during the three and nine months ended September 30, 2003.
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and are affected by trading performance and
redemptions. Accordingly, they must be compared in relation to the fluctuations
in the monthly net asset values. Brokerage commissions and fees for the three
and nine months ended September 30, 2003 decreased by $67,491 and increased by
$394,376, respectively, as compared to the corresponding periods in 2002. The
increase in brokerage commissions and fees is due to an increase in average net
assets during the nine months ended September 30, 2003 as compared to the
corresponding period in 2002.
14
Management fees are calculated on the portion of the Partnership's net
asset value allocated to each Advisor at the end of the month and are affected
by trading performance and redemptions. Management fees for the three and nine
months ended September 30, 2003 decreased by $131,044 and $131,516,
respectively, as compared to the corresponding periods in 2002.
Incentive fees are based on the new trading profits generated by each
Advisor as defined in the advisory agreements between the Partnership, the
General Partner and each Advisor. Trading performance for the three and nine
months ended September 30, 2003, resulted in incentive fees of $0 and
$2,316,083, respectively. Trading performance for the three and nine months
ended September 30, 2002 resulted in incentive fees of $2,070,142 and
$2,374,309, respectively.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification in this
section should not be considered to constitute any assurance or representation
that the Partnership's losses in any market sector will be limited to Value at
Risk or by the Partnership's attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
interval. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
16
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category at September 30, 2003 and the
highest and lowest value at any point during the three and nine months ended
September 30, 2003. All open position trading risk exposures of the Partnership
have been included in calculating the figures set forth below. As of September
30, 2003, the Partnership's total capitalization was $65,881,133. There has been
no material change in the trading Value at Risk information previously disclosed
in the Form 10-K for the year ended December 31, 2002.
September 30, 2003
(Unaudited)
Year to Date
of Total High Low Average
Market Sector Value at Risk Capitalization Value Risk Value at Risk Value at Risk
- --------------------------------------------------------------------------------
Currencies:
- -- Exchange Traded
Contracts $1,331,272 2.02% $1,896,311 $ 211,538 $1,043,879
- OTC Contracts 1,315,700 2.00% 1,939,976 799,040 1,206,063
Energy 1,088,650 1.65% 2,285,200 116,500 1,069,061
Grains 257,050 0.39% 393,350 132,100 304,611
Interest Rates U.S. 693,200 1.05% 1,380,050 237,125 718,512
Interest Rates Non-U.S 1,295,476 1.97% 2,711,474 441,993 1,291,472
Livestock 70,600 0.11% 156,400 25,200 54,524
Metals:
- -- Exchange Traded
Contracts 234,000 0.36% 309,500 40,500 177,056
- OTC Contracts 331,213 0.50% 485,830 4,600 277,202
Softs 345,453 0.52% 354,640 40,886 186,663
Indices 2,220,402 3.37% 5,010,346 42,662 2,151,861
--------- -----
Total $9,183,016 13.94%
========= ======
17
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of September 30, 2003, the President and Chief Financial Officer
of the General Partner have concluded that such controls and procedures are
effective.
During the Partnership's last fiscal quarter, no changes occurred in the
Partnership's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Partnership's
internal control over financial reporting.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following information supplements and amends our discussion set forth
under Part I, Item 3 "Legal Proceedings" in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002, as updated by our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 and
our Current Report on Form 8-K dated April 28, 2003.
ENRON
TITTLE, ET AL. v. ENRON CORP., ET AL.
On September 30, 2003, all of the claims against Citigroup in this
litigation were dismissed.
Additional Actions
Several additional actions, previously identified, have been consolidated
or coordinated with the Newby action and are stayed, except with respect to
certain discovery, until after the court's decision on class certification. In
addition, on August 15, 2003, a purported class action was brought by purchasers
of Enron stock alleging state law claims of negligent misrepresentation, fraud,
breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On
August 29, 2003, an investment company filed a lawsuit alleging that Citigroup,
CGM and several other defendants (including, among others, Enron's auditor,
financial institutions, outside law firms and rating agencies) engaged in a
conspiracy, which purportedly caused plaintiff to lose credit (in the form of a
commodity sales contract) it extended to an Enron subsidiary in purported
reliance on Enron's financial statements. On September 24, 2003, Enron filed an
adversary proceeding in its chapter 11 bankruptcy proceedings to recover alleged
preferential payments and fraudulent transfers involving Citigroup, CGM and
other entities, and to disallow or to subordinate bankruptcy claims that
Citigroup, CGM and other entities have filed against Enron.
Research
In connection with the global research settlement, on October 31, 2003,
final judgment was entered against CGM and nine other investment banks. In
addition, CGM has entered into separate settlement agreements with numerous
states and certain U.S. territories.
19
WORLDCOM
Citigroup and/or CGM are now named in approximately 35 individual state
court actions brought by pension funds and other institutional investors based
on underwriting of debt securities of WorldCom. Most of these actions have been
removed to federal court and transferred to the United States District Court for
the Southern District of New York for centralized pretrial hearings with other
WorldCom actions. On October 24, 2003, the court granted plaintiffs' motion to
have this matter certified as a class action.
OTHER
On November 3, 2003, the United States District Court for the Southern
District of New York granted the Company's motion to dismiss the consolidated
amended complaint asserting violations of certain federal and state antitrust
laws by CGM and other investment banks in connection with the allocation of
shares in initial public offerings underwritten by such parties.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -None
Item 5. Other Information - None
Item 6. The exhibits required to be filed by Item 601 of Regulation S-K are
incorporated herein by reference to the exhibit index of the Partnership's
Report on Form 10-K for the period ended December 31, 2002.
(a) Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of Chief financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certifications
(Certification of President and Director).
Exhibit - 32.2 - Section 1350 Certifications
(Certification of Chief Financial Officer and Director).
(b) Reports on Form 8-K - None
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel,
President and Director
Date: 11/13/03
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel,
President and Director
Date: 11/13/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Date: 11/13/03
21
Exhibit 31.1
CERTIFICATIONS
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney
Diversified Futures Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
22
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 13, 2003
By: /s/ David J. Vogel
-------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
23
Exhibit 31.2
CERTIFICATIONS
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney
Diversified Futures Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
24
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 13, 2003
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
25
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Diversified Futures Fund
L.P. II (the "Partnership") on Form 10-Q for the period ending September 30,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, David J. Vogel, President and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
By: /s/ David J. Vogel
- -------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
November 13, 2003
26
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Diversified Futures Fund
L.P. II (the "Partnership") on Form 10-Q for the period ending September 30,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and
Director of Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
By: /s/ Daniel R. McAuliffe, Jr.
- -------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
November 13, 2003
27